For SCORE, And Several Years to Go (Part Two)

I face three major challenges:

1. Increasing business dramatically in a short time, as discussed last week; and
2. Dealing with the logistics of succeeding at goal 1; and
3. Absorbing substantial new expenses that will change my cost structure.


How Do I Get There?

Here’s where I need informed advice. I have a decent sense of what I need to do to grow and what problems growth will bring. But I don’t know how to approach them – in what order, and at what expense?

Business is all about money. A wad of cash would fuel rapid growth. I let Curio City keep 25% of its annual profit each January; that should bring about $2,000 this year. Ordinarily I like to put that into new merchandise. Two charge cards have $50,000 in combined credit. I need to keep $10,000 of that liquid for operations, so I could actually spend $40,000 of it. That makes about $42,000 that I could access easily early next year. I get new credit card offers all the time, too, so I could easily raise more money that way. However, every instinct tells me that using credit card advances is a bad idea. The fine print on credit card agreements usually imposes personal liability for corporate debts – is that enforceable?

So let’s say that I really have $0 beyond operating cash. Two obvious questions arise.

1. How much money do I need to achieve the sales increase that I specified last week?

2. How can I get that money without risking my house or giving up ownership? Is that even possible, or am I stuck with the bootstrap approach that has brought me this far?

I can show a lender a profitable and growing business, but its only tangible asset is its inventory. Will a banker accept merchandise as collateral? My only personal assets are my house, my Fidelity IRA, and my Roth IRA. How can I borrow money without risking my house? My credit card contracts probably impose personal liability for corporate debts – how enforceable is that? My retirement accounts lost so much money in the crash that even liquidating them probably wouldn’t finance this expansion…which I obviously don’t want to do anyway.

Let’s pretend that I’ve somehow conjured up $50,000 or $100,000 on terms that are acceptable to me. How do I put it to work quickly and effectively?

1. Spend it on technology. Hire a web design firm to give my site a complete makeover. Graduate from Sunshop to a custom e-commerce engine. I currently spend very little on technology upgrades, relying mainly upon whatever improvements Turnkey makes to Sunshop. My budget just covers Sunshop version upgrades and the rare non-website expense (such as the version of QuickBooks that I’m about to buy). Based on past spending, $200,000 in planned sales suggests a $6,600 budget for technology. I’d probably need 2-3 times that much to abandon Sunshop for a complete redesign on custom software – let’s guess $15,000.

2. Spend it on online marketing. Hire a search engine optimization company to improve my organic search results. I might be able to squeeze a little more business out of pay-per-click advertising, but I think I’ve taken that about as far as it can go without becoming too expensive. How much should SEO cost? I’ve had offers ranging from $500 to optimize a few product pages up to many thousands of dollars for a complete site overhaul with ongoing maintenance. Staying toward the lower end is probably adequate for the modest sales boost that I’m seeking – remember that overshooting my goal would create all kinds of new hardships. Let’s guess $5,000.

3. Spend it on offline advertising. This is way outside my competence. I’d need to develop a professional-looking ad for a particular product, place it where it would generate at least ten times its own cost in new sales, and do that on a regular, predictable basis. I would have to outsource this whole process. Right now advertising is budgeted at 9% of gross sales. To sell $200,000 worth of stuff, do I need $18,000 (minus my current $4,000 expenditure) for a consultant and ad buys, or will that cost more than I expect? Let’s guess $20,000.

4. Spend it on inventory. I often say that “I cannot sell what I do not have.” If conversions remain steady and traffic grows as planned, I run into a storage problem. Given my low turn rate, additional merchandise might be the least efficient place to spend money. But bringing in new items is the easiest (and most fun) thing to accomplish. I’ve already got a stack of 15-20 catalogs with items that I know I could sell. How much money should I spend on inventory? If I want to sell $200,000 worth of stuff, and my turn rate is 1.5, then I need $133,333 worth of inventory, right? I currently have $42,400 worth of stuff in my cellar. That suggests that I need to spend about $45,000 to buy an additional $91,000 worth of stuff. Physical space is the biggest problem here. The only way I can double or triple the amount of stuff stuffed into my cellar is if my wife throws away her mounds of trash. But she won’t even throw away 2-3 boxes to make room for our storm windows. Renting off-site storage raises both cost and logistic problems.

Those rough estimates add up to $85,000. Let’s call it a cool $100,000 just for comfort.


Logistics

If sales suddenly tripled, would my website withstand the traffic? Could I physically fill the orders? Routinely processing and shipping 12 orders per day would take some time and attention away from my higher management functions. But I could physically handle it 10 months out of the year. Christmas is a different story. During last December’s big surge I hit 49 sales in one day. For a couple of weeks I was routinely making 20 sales per day. What happens if my peak numbers triple, too? I would smother under 60-150 orders a day.

This brings us back to a subject that I’ve written about again and again (check the posts tagged “planning” and “operations”): Kicking Curio City out of the house. It would be suicidal to crank up sales before I get a grip on this old problem. What is the best way to move shipping and receiving out of my house for the six weeks that I can’t handle alone? Should I rent a storage facility and hire some part-time kid to fill orders for a few weeks out of the year? Or should I permanently outsource fulfillment to a professional fulfillment firm, even though I don’t need that level of service 10 months out of the year? My warehouse and fulfillment costs are zero right now. It would be an enormous new expense. How much would it cost?

I’m no closer to answering these questions than I did the last half dozen times I posed them. Everything that came before is easy compared to this. Until I can figure out how I’m going to physically handle it, I don’t want a big sales increase. And so we reach point #3, "Absorbing substantial new expenses that will change my cost structure." I don't know what those expenses are, much less how much they will cost or how I will pay them. I only suspect that my business has to change fundamentally if I'm going to triple its size.

This is where I throw up my hands. As usual, I am stuck.